Article | October 2008 | by Duncan Young

Equity Release – Challenges to address

Equity release has withstood the test of the current market downturn well, notwithstanding the problems faced by two of the ‘original’ players, Northern Rock and Bradford and Bingley.  It is, therefore, no surprise that brokers are showing a growing interest in developing a presence in the market, despite the fact that volumes of written business have still to take off.

While the latest SHIP statistics show a 14% growth in the second quarter of 2008 over the first quarter, they were down on the corresponding quarter in 2007. And as the volumes are still relatively small in absolute terms, increased interest should give rise to significant percentage growth.

One reason for the lack of growth has to be an increase in the participation rate – simply, people are working to an older age. This is a perfectly natural reaction to the lack of pension provision and high consumer inflation. However, it is not the whole story. The current housing market malaise is testing equity release products severely and raising issues that have been conveniently swept aside in the past.

Many equity release products need the lubricating effect of house price inflation to make customers feel comfortable. Take, for instance, portability. As applicants become younger, the question of portability takes on greater significance. Many customers will look to move twice with their current equity release provider rather than just once. If the loan to value has suffered because of compounding interest and falling house prices – and equity release providers only have to underwrite a move on their terms – then many customers will be trapped in their existing properties. Remember, lack of portability within the product, rather than economic consequences, was one of the main gripes of Bank of Scotland Shared Appreciation Mortgage (SAM) customers, as well as a refinancing fraught with difficulty.

A similar problem arises with further advances. Many products have guaranteed availability of funds. But many customers will see that the principle of further advances is set out in the sales literature and will assume that additional money is available, even when it is not guaranteed. In a falling or even static market, is this a viable assumption? Most lenders have a very simple advance matrix of say 1% a year - so a 70 year old might be able to borrow 30% and a 71 year old 31% and so on. However when the debt is compounding up in the 6% to 7% range, it can quickly eat into permissible loan to values.

These are two issues that stand out due to current housing market conditions but they are not alone. The demise of the sub prime market has assisted the growth of the sale and rent back market, but it has also meant more applications for equity release by “sub prime” customers. Traditionally, it was an assumption by brokers and perhaps by customers that equity release products were not underwritten in the conventional sense. But this is changing as credit reference checks and other assessments are increasingly coming to the fore. This has meant that the more conventional equity release fact finds are not teasing out all the issues at an early enough stage in the process, leading to disappointment down the line, as cases are rejected.

One positive result of the current situation has been the increase in speed in which transactions are completed. At Retirement Plus, we are seeing two-week turnarounds between offer and funding and feedback from other product providers is that they are seeing a similar pattern. For brokers involved in these cases, part of the explanation is obviously a desire for money quickly, but part comes from the fact that customers are better informed and aware of the options available to them. The media coverage and the improving consumer information web sites have meant that customers are arriving at brokers’ offices saying “I want one of those”. This, in turn, puts brokers under pressure to be better informed and to provide the inside track on products. The information need is not helped by the lack of inclusive broker-facing information portals. The most inclusive is the Exchange, with Assureweb running hard to catch up, but neither completely covers the market. Trigold and Mortgage Brain are looking to expand their services, but in reality brokers, currently have to go on two or three websites to ensure total market assessment.

Brokers can take comfort that customers cannot, in general, approach product providers directly. SHIP insists that its members only transact advised sales. But it is increasingly difficult to tell a 55 year old of sound mind that they are incapable of researching and making a decision on where to apply. At some point the FSA will have to face up to the same issue. Why treat the broking of an equity release product differently from any other financial services product. There is an argument if the customer is elderly or frail but that is often not the case.

Perhaps part of the answer is to rebrand equity release and SHIP (when was the last home income plan sold?  Probably not in this millennium). It should be possible to allow brokers greater freedom to advise younger age groups and not call these transactions equity release but some other phrase, leaving equity release for an older age group. This would undoubtedly include all the reversion providers who, by and large, do not commence products until customers are at least 65. Perhaps SHIP’s name could be left as it is, but we should drop what it stands for – Safe Home Income Plans.

The equity release market is going through substantial change at the movement and the tectonic plates grinding together are capable of producing significant and lasting change. For brokers, it is quite difficult to keep abreast of what is happening and is especially concerning that these changes are not only time consuming, but may also be inhibiting customers from approaching them in the first place.

www.retirement-plus.co.uk

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